Wednesday, September 16, 2015

Weekly Purchase 4 - UL


As you may know, I am now using Capital One's Sharebuilder plan for my weekly investments. I am doing this to enforce my strategy for regular investing. This method also helps me filter out some of the market noise which is quite loud these days. Lastly, it is helping me spread out my purchases.

For this week's purchase, I bought around 25 shares of Unilever (UL).

Action
Security
Price
Quantity
Amount
Buy
UL
$39.67
25.1116
$1000 + fees

This purchase increases my forward dividends by $32.65.


Unilever (UL) is the world's third-largest consumer goods with over 400 brands.

You can check out Unilever’s investor relation site: https://www.unilever.com/investor-relations/understanding-unilever/about-unilever/

With more than 400 brands focused on health and wellbeing, no company touches so many people’s lives in so many different ways.
Our portfolio ranges from nutritionally balanced foods to indulgent ice creams, affordable soaps, luxurious shampoos and everyday household care products. We produce world-leading brands including Lipton, Knorr, Dove, Axe, Hellmann’s and Omo, alongside trusted local names such as Blue Band, Pureit and Suave.”
Note: I chose the UL since it does not have any foreign dividend tax withholding.

Criteria List

UL 9/2015
Area
Criteria
CheckList
Comment
Quality Company
Dividend Growth
>5 years
No
3 Yrs - see below
ROE/Op Margin
Stable
Yes
Stable
Long term Avg Growth
Stable
Yes
Stable
FCF over Dividends
Yes
Yes
FCF covers Dividends
M* Moat
Wide Moat
Yes
Wide
M* & S&P
Credit Rating
> BBB+
Yes
A+
Cash to Debt & Interest Coverage, Debt to Equity
Cash Debt >1 or Interest Coverage > 5
Yes
Cash to Debt 0.28
Interest Coverage 20
Debt to Equity 53
M* & S&P Stars
> 3 Stars for both
Yes
M* 4 Stars
S&P CapIQ 3 Stars NR rated
Payout Ratio
<60%
Yes
60% (67% TTM)
Dividend Growth
& Yield
Dividend Yield
>3%
Yes
3.32%
Dividend Growth
>5%
Yes
7.30%
Chowder
>12%
No
10.62%
Valuation
Yield/Avg Yield
>1.1
No
1.0
Dividend Yield Theory Mid Point
Below Mid Point
Yes
Mid Point 41.95
Low Point 34
P/E
Below Mid Point
Yes
Median 22.81 Current 20.86
DRRM
~10%
Yes
Assuming 6.5% growth; projected return=10.35%
M* Estimate
<M* est
Yes
M* 47
S&P Estimate
< S&P cap IQ est
Yes
S&P Cap 47
Data from GuruFocus, M*, Yahoo Finance, Google Finance

Note: UL actually kept their dividends steady. The dividend history goes back more than 20 years. Also, adding to the complexity, is the exchange rate conversion.

Valuation Considerations

P/E Analysis
UL’s price has a relatively tight correlation with the EPS. As you can see the EPS is slowly growing.since 2008. Future EPS growth is in the 7-9% range (M*, S&P Cap IQ).


UL's current P/E is slightly below the midpoint earnings multiple which suggests that it is close to fair value.
To estimate the fair value using the high and low earnings multiples, see my article and spreadsheet: http://div4son.blogspot.com/2015/06/using-pe-for-dividend-stock-valuation.html

Based on this, the mid price point is around 42.

High P/E
25.90
Mid P/E
22.25
Low P/E
18.60


High Price
49.21
Mid Price
42.28
Low Price
35.34


Dividend Yield Theory
Using the dividend yield theory spreadsheet (based on the Dividends Don't Lie book), I calculate the mid and high points for the yield, from which I derive the price.  
I estimate the high and low points to be 4.5% and 3.0% respectively.

High Price:
52.06
Mid Price:
43.38
Low Price:
34.71

Based on this, the price point is around 43.

DDRM
Also, using the DDRM model per the Dividend Playbook, I try to estimate the total return. Using the growth information from above, I estimate a conservative growth rate of 6.5 (S&P Capital IQ has a 9% EPS growth).


DDRM

Dividend Rate ($)
1.32
Divided by: share price
39.74
Current yield (%)
3.32
Core Growth Estimate (%)
6.50
Divided by: ROE (%)
33.25
Multiplied by: EPS ($)
1.90
Cost of Growth (%)
0.37
Earnings per Share ($)
1.90
Minus: Dividend
1.32
Minus: Cost of Growth
0.37
Funding Gap ($)
0.21
Divided by: Share Price ($)
39.74
Share Change (%)
0.53
Core Growth (%)
6.50
Plus: Share Change (%)
0.53
Total Dividend Growth (%)
7.03
Plus: Dividend Yield (%)
3.32
Projected Total Return (%)
10.35


Dividend Rate ($)
1.32
Required Return (%)
10.00
Growth (%)
7.03
Price
44.37


Dividend Rate ($)
1.32
Required Return (%)
10.00
Growth (%)
6.50
Price
37.70


Average
41.03


I estimate the fair price to be in the low 40s. It is much better to get it below 40 (if you can) to reduce further downside risk.

Anyway, let’s hope the market stays low for the next few weeks so that I can continue to buy excellent DGI companies at fair valuations.

Let me know what you think of Unilever?

D4s

10 comments:

  1. Nice purchase, Div4Son. UL is a really strong company and I like their product portfolio -- wish I had more capital to invest in it.

    Best
    R2R

    ReplyDelete
    Replies
    1. R2R,
      I agree. It is a very strong company. I would like to build this position over time.
      D4s

      Delete
  2. Congrats on the addition to the portfolio!

    Im not sure what is going on with their dividend though. Is it look like its declining because the currency rate exchange? The last few years show a decline in overall price dividend right?

    ReplyDelete
    Replies
    1. Adam,
      Thanks for your comment. There is a degree of currency fluctuation. See here: http://compoundingincome.blogspot.com/2014/02/unilever-hasnt-cut-dividends-in-past.html
      D4s

      Delete
  3. Hi Div Son, I bought UL on Sept 1 for $39.35. With UK stocks I don't have to pay any dividend withholding tax (I pay 30% withholding for U.S. dividends and 25% withholding from Canadian dividends). I was disappointed to find out that dividend reinvesting is not allowed with UL. I also have UK stocks Diego (DEO) and National Grid (NGG) and dividend reinvesting is allowed with these. I wonder why some stocks do not allow it? Eaton (ETN) also doesn't allow reinvesting. I'd rather have stocks that the dividend can be automatically reinvested. Also I should try and focus on the UK stocks the most because the 30% withholding from the U.S. dividends is a lot, esp when dealing with larger amounts (as will be in the future hopefully). Do you have any idea about the automatic reinvesting allowed for some but not others?
    Thanks Nicky

    ReplyDelete
    Replies
    1. Nicky,
      Thanks for visiting! You got UL at a very fair price!
      Sorry. I am not a tax adviser, so I cannot offer any advice on this area (or any financial area - see disclaimer). In regards to dividend reinvestment, I use CapitalOne Sharebuilder which provides free reinvesting. I think fidelity offers the same service. Assuming you are in the US, check with your broker or other brokers to see if this option is available to you.
      D4s

      Delete
  4. Thanks D4s, no I'm not in the U.S. which is why I pay 30% withholding on US stocks - but nothing on UK stocks (great!). I use Charles Schwab and tick the 'dividends reinvested' box when I purchase shares - but for some stocks this option is "not allowed". I guess it is an individual company situation.
    Thanks for your very interesting and informative blog!

    ReplyDelete
    Replies
    1. Ah... Okay. Good luck with finding a broker who can give you free reinvesting.
      D4s

      Delete
  5. Excellent analysis. I started looking at Unilever recently after doing and analysis on PG. I usually try to compare a stock to competitors in the same sector and industry to compare their estimated growth forward, PEG, PEGY.
    UL is looking like a better alternative. Nice write up.

    ReplyDelete
    Replies
    1. DividendChimp,
      Thanks for your comment. The growth of PG is stagnating. Having said that, I really don't mind adding more - except that it will be a while before I cycle back to it. As for UL, I definitely need to bulk up this position. Let's see how the market behaves in the next few months.
      D4s

      Delete